Investment Thesis:

Impact of TPG’s entrance into Singapore is contained. TPG is slated to become Singapore’s 4th mobile network operator (MNO). Due to a delay indoor network rollout, commercial launch should commence 2H19 rather than the targeted end FY18 launch. TPG has announced a 5% market share target in mobile subscribers (~ 260k subs). This also equates to less than S$50mn in EBITDA. TPG announced CAPEX of S$200-300mn for the mobile network rollout and had thus far spent less than S$100mn. As a comparison, STARHUB LTD (SGX:CC3) to date has spent approximately $600mn in maintaining and improving its 4G network. We believe this low level of CAPEX will affect coverage, reliability and overall quality of the network. It will prevent consumers from switching completely away from incumbent networks. Also, TPG Singapore will have much less financial resources to tap on once merger of TPG Australia and VHA results in segregation of balance sheets. TPG is offering free trials for the first 20k customers that register interest with them. We do not view this as a major threat to the incumbents. It only represents 0.38% of total post-paid customers and even less significant on revenue, as these are the most price-sensitive segment.

Enterprise provides a growth driver for the telcos. The enterprise segment is benefitting from the resumption of smart nation projects and demand from businesses especially from small & medium enterprise (SME), hospitality and financial services. Companies are requiring more connectivity, data centre and cloud solution, managed security and network services. We believe SINGTEL (SGX:Z74) and StarHub is well positioned to take advantage of this growth.

CAPEX for 5G not a cause for concern. There is much anticipation over the commencement of the 5th generation network. We estimate that this rollout will take place in 2020. However, we do not expect a nationwide rollout by individual operators. There is little incentive or applications available for consumers to pay for such an upgrade. We expect the network rollout to be in phases and tailored to enterprise customers. As a result, CAPEX activities should be gradual. Spectrum rights bidding should be at rational levels, we do not expect an intense bidding process like what we observed for the bidding of 3G spectrum rights.

Singapore Mobile Sector

At present there are two underlying trends in the mobile sector:

Emergence of MVNOs: In total there are 4 MVNOs, Circles.Life collaborates with M1 LIMITED (SGX:B2F), Zero and Zero1 are working with SingTel, MyRepublic is partnered with StarHub. These MVNOs lease the mobile network from the MNO. As a result, they have the same network quality and reliability as the MNO. These MVNOs compete in the price-sensitive space and generally offer competitive price plans. The MNO charges the MVNO at a wholesale rate for using their network. Circles.Life intends to grab a market share of 5%.

Higher adoption of SIM-only plans: We expect a higher rate of adoption of SIM-only plans due to the longer replacement lifecycle of smartphones. Traditional bundled plans normally command a higher premium the introduction of SIM-only plans reduces profitability.

The MVNOs strategy is to target niche markets in Singapore. It essentially targets the most price-sensitive segments. Their presence has undoubtedly weighed down on the telco sector with their competitive pricing strategy and by offering larger data plans to its customers. However some earnings will flow back to their MNO partner. Zero & Zero1 targets consumers who are always on the move with their large amount of data. Circles.Life being the oldest MVNO in town has managed to add subscriber base to its MVNO partner M1. MyRepublic, the newest operator, has managed to increase postpaid subscriber for StarHub since its launch in early 2018. MNOs do not disclose the commercial arrangements with MVNO partner.

SIM-Only Plans vs traditional bundled plans

As seen in figure 5, customer spend is substantially lower in the lifetime of a contract under the SIM-Only plan as compared to traditional handset plans. As such, net revenue will be weighed down by the higher adoption of SIM-Only plans.

The telcos have reacted to these shifts by offering greater options in the SIM-Only space and handset leasing services to cope with the change in consumer preference. We expect continued weakness from the mobile segment in the medium term.

We observe a re-allocation of pre-paid customers to post-paid as the popularity of SIM-only plan

increases. Higher spending prepaid customers now have SIM-Only plans as an alternative to using the pre-paid services. The decrease in pre-paid can also be explained by the removing of inactive numbers and lower foreign worker use. We expect the number of pre-paid customers to continue its decline in the medium term.

Pay-TV sector

The pay-tv market in Singapore is operating under challenging conditions. Industry subscribers has contracted approximately 8% y-o-y (or 65k) as consumers turn to cheaper Over-The-Top (OTT) players such as Netflix, Amazon video and Hulu Plus. OTT players have been disrupting the pay-tv business since early 2016 and changing the way consumer consume content with videos on demand at a lower price. We expect the pay-tv market to further contract by 7% in 2019.

The pay-tv business model is under pressure from declining ARPU and declining subscribers, whilst content-cost is fixed. We believe StarHub recognises that the business model is broken and is renegotiating with content providers to switch from a fixed-cost model to a variable cost model. Singtel is taking another approach from StarHub, they are closely reviewing the content available on their platform to phase out unpopular channels.

The enterprise segment is benefitting from the resumption of smart nation projects and demand from businesses especially from small & medium enterprise (SME), hospitality and financial services. Companies are requiring more connectivity, data centre and cloud, managed security and network services. We believe SingTel and StarHub is well positioned to take advantage of this growth.

StarHub is undertaking a massive investment in the enterprise segment. StarHub expanded its enterprise segment by an average rate of 7.2% p.a. since FY16 and 13% y-o-y in the 3Q18. This is driven mainly by its managed services segment offsetting declines in the traditional data & internet and voice services. The performance in managed services is largely driven by the consolidation of acquisitions Accel Systems and D’Crypt. In addition, to tap on the growing demand for cyber-security StarHub and a Temasek wholly-owned subsidiary has formed a joint-venture company named Ensign InfoSecurity Pte Ltd. Ensign is a pure-play cyber-security company. It aspires to be a global cyber security platform to address the demand in both Singapore and global market. Expected revenue is in excess of S$100mn annually. StarHub has a 40% ($36mn) stake in Ensign.

We continue to see SingTel’s enterprise segment come under pressure we believe some market share is being taken away by StarHub and other smaller players. SingTel’s managed services revenue shrunk by 3.7% y-o-y. We believe SingTel is losing its ability to price at a premium because of new entrants like StarHub and other companies.

Investment Actions

We expect a turnaround in associates largely driven by a recovery in Telkomsel,

TPG Telecom is unlikely to pose a serious threat to the incumbents,

Enterprise business will benefit from resumption of smart nation initiatives. We initiate coverage on SingTel with a BUY rating and a target price of S$3.40. See report: SingTel - Turnaround In Associates.

Stock analysis research and articles on this site are for the purpose of information sharing and do not serve as recommendation of any transactions. You will need to make your own independent judgment regarding the analysis. Source of the report is credited at the end of article whenever reference is made.